Don’t Blame Green For GE’s Problems

Her article interprets Welch’s latest message delivered at The Tulsa Business Forum hosted by Oklahoma State University’s Spears School of Business as: “The main social responsibility for a company is to win.”

Apparently, Welch is not impressed with the bevy of new alternative-energy products offered by GE [GE], which have generated some $18 billion in annual revenue. As reported by the Tulsa World, Welch said, “If it doesn’t turn green into green, it doesn’t turn out to be a helluva good business. The whole idea is to grow jobs,” adding, “The main social responsibility for a company is to win.”

“We played business like it was a sport,” Welch said of his philosophy heading up GE from 1981 to 2001. “You make a game of it; you field the best team and weed out the weakest. The weeds you’ve got to pull out if you’re going to build a beautiful garden.”

The clear implication from Welch’s talk is that if he was still running GE, the Ecomagination projects that CEO Jeff Immelt vaunts, and President Obama praises, would be high on his list of “weeds” to be pulled, because they don’t make money fast enough.

Does this make any sense?

GE has a problem

First, let’s face it. GE has a problem. Its share value is now roughly 50% of what it was ten years ago, when Jack Welch retired. He is right to point this out, even obliquely. He is also right to imply that it’s misguided to argue (like Michael Porter) that “going green” is a panacea that will by itself save either GE or the entire US economy.

When one compares GE’s performance to companies like Apple [AAPL] or Amazon [AMZN] whose share prices are now more than ten times what they were a decade ago, one can see that GE has a management problem of some kind. The question is: what kind?

GE’s problem is not in going green

Second, as Aman Singh points out, other businesses like Seventh Generation, Timberland, and Tom Shoes, are proving every day that green can be highly profitable. The question is how to achieve that kind of profitability.

Part of GE’s problem is Jack Welch’s legacy

Whatever else Jack Welch was, he was lucky. He left GE the day before September 11, 2001, thus leaving his predecessor to cope with the impact of September 11 on its business, parts of which were severely affected, e.g. its aircraft engine business.

He was also able to appear as the master of the universe by steadily growing GE’s earnings, in part through arrangements with GE Finance, which didn’t unravel until the financial crisis of 2008.

Jack Welch’s management regime looked good at the time, in part because the legacy of problems that he bequeathed to his successor didn’t appear until after he left.

GE’s main problem today is 20th Century management

GE’s main problem today is however something else: another Jack Welch legacy: 20th Century management. This is a view of the world that sees organizations as pushing products and services at customers, of tweaking the supply chain, of parsing and manufacturing demand, with the goal of making money of shareholders. It has been called shareholder capitalism and Jack Welch was its sponsor.

It was a way of managing that worked reasonably well, decades ago, when the marketplace was dominated by a few oligopolies (customers lacked both options and information about the options) and most work was semi-skilled work.

Today that world has all but vanished. The reality is that we now live in the age of customer capitalism. As a result of epochal shift of power in the marketplace from seller to buyer, the customer is now in charge. Making money and corporate survival now depend not merely on satisfying customers but delighting them. To prosper, firms must have knowledge workers who are continuously innovating and delivering a steady supply of new value to custonmers and delivering it sooner. The new bottom line of business becomes: is the customer delighted? It’s a fundamental shift from outputs to outcomes.

Firms like Apple [AAPL] and Amazon [AMZN] have grasped this transition and taken advantage of it. GE has yet to embrace it a wholesale way.

Not that GE’s declining performance is in any way exceptional. GE’s performance reflects disastrous declining trends across a wide array of firms, as shown by a comprehensive study of some 20,000 US firms by Deloitte’s Center for the Edge.

The rate of return on assets of US firms is one quarter of what it was in 1965.

The life expectancy of a firm in the Fortune 500 has declined to less than 15 years and is heading towards 5 years unless something changes.

Executive turnover is accelerating.

The topple rate of leading firms is speeding up.

Only one in five workers is fully engaged in his or her work: the larger the company, the lower the level of passion among the workers.

In this new world, the Jack Welch style of management involving dictatorial management, tight control, ruthlessly cutting costs and pulling out weeds, measurement of outputs and sole focus on shareholder value is no longer appropriate or effective. It’s the problem, not the solution.

Instead, managers now have to be helping focus everyone in the organization on the goal of adding value to customers and delivering it sooner, rather than merely tweaking the supply chain and searching for efficiencies.

Bottom line: don’t blame green

So yes, Jack Welch is right to point out that GE has a problem: GE does need to be making more money. But blaming green isn’t going to fix it. Instead, GE has to transform its management into something fit for the 21st Century marketplace.

GE—and Jack Welch—can learn what the new way of managing is all about from Roger Martin his classic HBR article Martin, R. “The Age of Customer Capitalism.” Harvard Business Review, Jan. 2010, pp. 58–65, or in The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison, Reorganize for Resilience by Professor Ranjay Gulati.

To learn more

If you would like to learn even more about reinventing management, please join me for two days on May 12-13, 2011 in Washington DC in a workshop that is all about cool, innovative and serious fun. More details here.

In this new world, the Jack Welch style of management involving dictatorial management, tight control, ruthlessly cutting costs and pulling out weeds, measurement of outputs and sole focus on shareholder value is no longer appropriate or effective. It’s the problem, not the solution.